Let others have the senior citizen business; I'll take all the rest.
Senior citizens don't get wheat discounts because there are too many
opportunists like me around. Price discrimination can succeed only where it
cannot be competed away.
If price discrimination is viable only for a monopolist, and if price
discrimination is as common as our many examples seem to indicate, we
are forced to conclude that monopolies are everywhere. But many
economists—including most of those whom I know well—are quite
skeptical of that conclusion.
From this skepticism, there arises a parlor game. The game is to take
examples of apparent price discrimination and debunk them. The goal is to
argue convincingly that the single product being sold at two different prices
is not a single product at all but two quite different products.

…

I have known economists who made hobbies of collecting examples of
price discrimination. (Price discrimination is economic jargon for selling
the same product at more than one price.) Airlines charge different prices
depending on whether you stay over a Saturday, hotels charge different
prices depending on whether you make reservations in advance, car rental
agencies charge different prices depending on whether you belong to a
frequent flyer program, doctors charge different prices depending on your
income and your insurance status, and universities charge different prices
depending on your grades and your family's income. Any giveaway that is
claimed by only some buyers (such as trading stamps or free delivery) can
be a form of price discrimination, as is a policy of "ten cents apiece,
Why Popcorn Costs More at the Movies
163
three for a quarter."

…

Leaded gasoline sells for less than unleaded gasoline
despite comparable production costs, free coffee refills mean that some
people pay more per cup than others, and two prices at the salad bar depend
on whether you order a complete meal or just the salad. Price
discrimination, in short, appears ubiquitous.
Yet there is a good theoretical reason to believe that price discrimination
should be relatively rare, and therein lies a puzzle. To see the problem, let's
return to the movies.
I have argued that $3 popcorn makes sense only as a form of price
discrimination. Popcorn lovers have more fun at the movies and are
therefore asked to pay more. But if this is the whole story, then why don't
popcorn lovers simply patronize a different theater?
Presumably my airline seatmate would have had no trouble with this one;
he could have told me that shopping elsewhere is not an option because the
situation is the same all over town.

The second caveat is a bit longer as it is concerned with price discrimination, and we examine it next.
The example of AIDS drugs brings out another feature of monopolies –
their desire to price discriminate. That is, competitors charge the same price to everyone, but monopolies try to extract a higher price from those who value the product more highly. Economists usually argue that this is a good thing because monopoly without price discrimination is even worse than monopoly with price discrimination. Price discrimination, they argue, enables lower-valued consumers to purchase a product that otherwise the monopoly would not sell to them. Relatively speaking – that is, relative to a world where the monopolist does not price discriminate – this is a correct statement. In the case of AIDS drugs, effective price discrimination would enable the large pharmaceutical companies to charge a low price to poor Africans without lowering the price they charge rich Westerners.

…

Because the cost of producing a larger quantity of AIDS drugs is very low, the pharmaceutical companies would make a profit also by selling cheaply to the African market. Their problem is the loss of monopoly profits in markets other than the African one. This example is, in fact, quite general: intellectual monopolists often fail to price discriminate because doing so would generate competition from their own consumers.
Effective price discrimination is costly to implement and this cost represents pure waste. For example, music producers love digital rights management (DRM) because it enables them to price discriminate. The reason that DVDs have country codes, for example, is to prevent cheap DVDs sold in one country from being resold in another country where they have a higher price. Yet the effect of DRM is to reduce the usefulness of the product. One of the reasons that the black market in MP3s is not threatened by legal electronic sales is that the unprotected MP3 is a superior product to the DRM-protected legal product.

…

The pricing policy of Boulton and Watt’s enterprise was a classical example of monopoly pricing: over and above the cost of the materials needed to build the steam engine, they would charge royalties equal to one-third of the fuel cost-savings attained by their engine in comparison to the Newcomen engine. Notice two interesting properties of this scheme: it allows for price discrimination, and it is founded on the hypothesis that, thanks to patent protection, no further technological improvement will take place. It allows for price discrimination because, given the transport technology of the time, the price of coal – and horses, the alternative to the Newcomen engine being horses – varied substantially from one region to another. It assumes that technological improvement will be stifled, because it is based on the idea that only the Watt engine could use less coal than the Newcomen engine.

Regulatory Reform in the Airline Industry,” NBER Working Paper, September 2007; and Steven Puller, Anirban Sengupta, and Steven Wiggins, “Testing Theories of Scarcity Pricing in the Airline Industry,” NBER Working Paper, December 2009. Evidence of price discrimination in the concert industry is in Pascal Courty and Mario Pagliero, “The Impact of Price Discrimination on Revenue: Evidence from the Concert Industry,” CEPR Discussion Paper, January 2009; and Pascal Courty and Mario Pagliero, “Price Discrimination in the Concert Industry,” CEPR Discussion Paper, January 2009. Price discrimination by Coke from Constance Hays, “Variable-Price Coke Machine Being Tested,” New York Times, October 28, 1999. Price discrimination by Amazon from Joseph Turow, Lauren Feldman, and Kimberly Meltzer, “Open to Exploitation: American Shoppers Online and Offline,” University of Pennsylvania Annenberg Public Policy Center, June 2005 (http://www.annenbergpublicpolicycenter.org/Downloads/Information_And_Society/Turow_APPC_Report_WEB_FINAL. pdf. , accessed 08/01/2010).

…

Examining the 2008 Zagat restaurant guide for New York City, two economists discovered that restaurants rated as romantic or with a good singles scene charged up to 6.9 percent more for appetizers and up to 14.5 percent more for desserts, relative to the cost of the main course, than did restaurants classified as good places to have business lunches. The reason, they surmised, could well be that couples—if they liked each other—would linger and order an appetizer, perhaps a dessert. It would be unromantic for either to make a fuss about the price. So a restaurant could charge them relatively more for these “romantic” items on the menu.
The technique—called, appropriately, “price discrimination”— is ubiquitous. What else is the student discount at the bookstore, or the cheap matinee ticket on Broadway? Books are published in pricey hardcover months before their paperback edition to capitalize on those who can’t wait to read it and will pay more to get it faster. Apple launched an eight-gigabyte iPhone at $599 in June of 2007, to capture the early adopters who would pay anything to be among the first to have one.

…

An editorial about the idea in the San Francisco Chronicle was titled “Coke’s Automatic Price Gouging.” Pepsi saw the opening and announced it would never “exploit” its hot customers. Ivester defended the plan. He told Veja, “It is fair that it should be more expensive. The machine will simply make this process automatic.” Still, Coca-Cola dropped the idea.
The Internet is likely to bring price discrimination into every corner of our lives. In September of 2000, Amazon.com was caught offering the same DVDs to different customers at discounts of 30 percent, 35 percent, or 40 percent off the manufacturer’s suggested retail price. Amazon said the differential pricing was due to a random price test. It denied that it was segregating customers according to their sensitivity to price, which could be gleaned from their shopping histories recorded on their Amazon profiles.

Black customers, for instance, pay on average about $9 less per trick than white customers, while Hispanic customers are in the middle. Economists have a name for the practice of charging different prices for the same product: price discrimination.
In the business world, it isn’t always possible to price-discriminate. At least two conditions must be met:
Some customers must have clearly identifiable traits that place them in the willing-to-pay-more category. (As identifiable traits go, black or white skin is a pretty good one.)
The seller must be able to prevent resale of the product, thereby destroying any arbitrage opportunities. (In the case of prostitution, resale is pretty much impossible.)
If these circumstances can be met, most firms will profit from price discriminating whenever they can. Business travelers know this all too well, because they routinely pay three times more for a last-minute airline ticket than the vacationer in the next seat.

…

Women who pay for a salon haircut know it too, since they pay twice as much as men for what is pretty much the same haircut. Or consider the online health-care catalog Dr. Leonard’s, which sells a Barber Magic hair trimmer for $12.99 and, elsewhere on its site, the Barber Magic Trim-a-Pet hair trimmer for $7.99. The two products appear to be identical—but Dr. Leonard seems to think that people will spend more to trim their own hair than their pet’s.
How do the Chicago street prostitutes price-discriminate? As Venkatesh learned, they use different pricing strategies for white and black customers. When dealing with blacks, the prostitutes usually name the price outright to discourage any negotiation. (Venkatesh observed that black customers are more likely than whites to haggle—perhaps, he reasoned, because they’re more familiar with the neighborhood and therefore know the market better.) When doing business with white customers, meanwhile, the prostitute makes the man name a price, hoping for a generous offer.

…

As it was, a fifteen-hour workload generated more than $200,000 a year in cash.
Eventually she raised her fee to $350 an hour. She expected demand to fall, but it didn’t. So a few months later, she raised it to $400. Again, there was no discernible drop-off in demand. Allie was a bit peeved with herself. Plainly she had been charging too little the whole time. But at least she was able to strategically exploit her fee change by engaging in a little price discrimination. She grandfathered in her favorite clients at the old rate but told her less-favorite clients that an hour now cost $400—and if they balked, she had a handy excuse to cut them loose. There were always more where they came from.
It wasn’t long before she raised her fee again, to $450 an hour, and a few months later to $500. In the space of a couple of years, Allie had increased her price by 67 percent, and yet she saw practically no decrease in demand.

pages: 337words: 86,320

Everybody Lies: Big Data, New Data, and What the Internet Can Tell Us About Who We Really Are
by
Seth Stephens-Davidowitz

Better prediction can lead to subtler and more nefarious discrimination.
Better data can also lead to another form of discrimination, what economists call price discrimination. Businesses are often trying to figure out what price they should charge for goods or services. Ideally they want to charge customers the maximum they are willing to pay. This way, they will extract the maximum possible profit.
Most businesses usually end up picking one price that everyone pays. But sometimes they are aware that the members of a certain group will, on average, pay more. This is why movie theaters charge more to middle-aged customers—at the height of their earning power—than to students or senior citizens and why airlines often charge more to last-minute purchasers. They price discriminate.
Big Data may allow businesses to get substantially better at learning what customers are willing to pay—and thus gouging certain groups of people.

It has been estimated that Daniel restaurant in New York has $800,000 of wine stored. From a business point of view that’s another relevant cost. If you love drinking, by all means pony up; but if your drink is just an impulse purchase, maybe give it a second thought. Is it really worth it?
High prices for drinks are often a form of price discrimination, an economic term which refers to the extraction of additional money from the people willing to pay more for the product. For instance it’s price discrimination when a movie theater offers discounts to senior citizens. The cinema realizes that a certain group in their customer base (senior citizens) will see more of their movie offerings if they give them a special price. The rest of the customer base isn’t so price sensitive, so the cinema “discriminates” against them.

…

On the history of the free lunch, see Madelon Powers, Faces Along the Bar: Lore and Order in the Workingman’s Saloon, 1870–1920 (Chicago: University of Chicago Press), 1998.
On drink pricing and the use of table space, see John R. Lott Jr. and Russell D. Roberts, “A Guide to the Pitfalls of Identifying Price Discrimination,” Economic Inquiry, January 1991, vol. 29, no. 1, pp. 14–23.
On the history of popcorn, see Andrew F. Smith, Popped Culture: A Social History of Popcorn in America (Columbia: University of South Carolina Press, 1999), pp. 102, 119–120, 159. For a study of the empirics of popcorn pricing, see Ricard Gil and Wesley Hartmann, “Empirical Analysis of Metering Price Discrimination: Evidence from Concession Sales at Movie Theaters,” working paper, 2008.
For one look at the economics of movie distribution, see Peter Caranicas, “Studios at the Brink,” Variety Magazine, May 3–9, 2010, pp. 1, 70.

…

Those people, on average, just don’t drink that much Coke or Pepsi. So if you like Coca-Cola at all, the time to get it is with Chinese food, when it is much cheaper and it is not being used to extract extra revenue from spendthrifts. More broadly, if the customers in a restaurant are elderly non-Americans from countries where Coke is a relatively recent innovation, the Coke is probably going to be cheap. That is to say, it won’t be a vehicle for price discrimination.
Of course not every Chinese restaurant has cheap Coke, because not every Chinese restaurant is marketing its product toward traditional Chinese. If you go to a yuppie-oriented, socially oriented P.F. Chang’s, you’re back to the higher price for the soft drink. In my local China Star restaurant, which attracts a largely Chinese clientele, a Coke costs $1.00, circa 2010, with free refills.

I think the report understated the risk.
Price discrimination is also a big deal these days. It’s not discrimination in the same classic racial or gender sense as weblining; it’s companies charging different people different prices to realize as much profit as possible. We’re most familiar with this concept with respect to airline tickets. Prices change all the time, and depend on factors like how far in advance we purchase, what days we’re traveling, and how full the flight is. The airline’s goal is to sell tickets to vacationers at the bargain prices they’re willing to pay, while at the same time extracting from business travelers the much higher amounts that they’re willing to pay. There is nothing nefarious about the practice; it’s just a way of maximizing revenues and profits. Even so, price discrimination can be very unpopular.

…

Even so, price discrimination can be very unpopular.
Raising the price of snow shovels after a snowstorm, for example, is considered price-gouging. This is why it is often cloaked in things like special offers, coupons, or rebates.
Some types of price discrimination are illegal. For example, a restaurant cannot charge different prices depending on the gender or race of the customer. But it can charge different prices based on time of day, which is why you see lunch and dinner menus with the same items and different prices. Offering senior discounts and special children’s menus is legal price discrimination. Uber’s surge pricing is also legal.
In many industries, the options you’re offered, the price you pay, and the service you receive depend on information about you: bank loans, auto insurance, credit cards, and so on. Internet surveillance facilitates a fine-tuning of this practice.

…

Using personal data to determine insurance rates or credit card spending limits might cause some people to get a worse deal than they otherwise would have, but it also gives many people a better deal than they otherwise would have.
In general, however, surveillance data is being used by powerful corporations to increase their profits at the expense of consumers. Customers don’t like this, but as long as (1) sellers are competing with each other for our money, (2) software systems make price discrimination easier, and (3) the discrimination can be hidden from customers, it is going to be hard for corporations to resist doing it.
SURVEILLANCE-BASED MANIPULATION
Someone who knows things about us has some measure of control over us, and
someone who knows everything about us has a lot of control over us. Surveillance facilitates control.
Manipulation doesn’t have to involve overt advertising.

It was arranged that both members of a pair visited the same dealership within a few days of each other, to bargain for the same model of car.
Ayres and Siegelman’s results occasioned much indignation in the media. Evidence of price discrimination is a complicated thing, though, difficult to reduce to a sound bite. As Ayres pointed out, his results did not necessarily imply what many were assuming—that dealers were prejudiced and wanted to exploit blacks and women. The dealers often steered the volunteers to salespeople of their own race and gender “who then proceeded to give them the worst deals.” Blacks actually got better deals from white dealers, and women got better deals from men.
In 1996 Pinelopi Koujianou Goldberg published another price discrimination study that appeared to overturn any conclusions drawn from Ayres and Siegelman. Instead of doing an experiment, Goldberg used the Consumer Expenditure Survey to check what buyers nationwide had paid for new cars from 1983 to 1987.

…

But the experiment wasn’t designed to test whether black and female buyers bargain differently than white males.
One plausible guess is that many dealers believed in the “sucker theory.” Therefore, they quoted many high initial prices to minorities (in Ayres-Siegelman). Buyers quoted a high initial price tended to bargain longer and harder than buyers quoted a good price. This erased most of the evidence of racial and gender bias (in Goldberg).
If nothing else, this shows how complex price discrimination can be. It’s possible that some dealers weren’t even aware of a sucker theory. Their price quotes may have been statistically biased by race and gender without any conscious intention.
Ayres found that one bit of information was worth $319 to buyers across genders and races. Volunteers who said they had already taken a test drive paid an average of $319 less than those who didn’t, and this was statistically significant.

Airlines are the most obvious example of price discrimination, but look around and you will start to see it everywhere. Al Gore complained during the 2000 presidential campaign that his mother and his dog were taking the same arthritis medication but that his mother paid much more for her prescription. Never mind that he made up the story after reading about the pricing disparity between humans and canines. The example is still perfect. There is nothing surprising about the fact that the same medicine will be sold to dogs and people at different prices. It’s airline seats all over again. People will pay more for their own medicine than they will for their pet’s. So the profit-maximizing strategy is to charge one price for patients with two legs and another price for patients with four.
Price discrimination will become even more prevalent as technology enables firms to gather more information about their customers.

…

* I cannot fully explain why the pharmaceutical companies were so resistant to providing low-cost HIV/AIDS drugs to Africa. These countries will never be able to pay the high prices charged in the developed world, so the companies would not be forgoing profits by selling the drugs cheaply. In places like South Africa, it’s either cheap drugs or no drugs. This would appear to be a perfect opportunity for price discrimination: Make the drugs cheap in Cape Town and expensive in New York. True, price discrimination could create an opportunity for a black market; drugs sold cheaply in Africa could be resold illegally at high prices in New York. But that seems a manageable problem relative to the huge public relations cost of denying important drugs to large swathes of the world’s population.
* There is a subtle but important analytical point here. Those who argue that tax cuts increase government revenues often point out, correctly, that government revenues are higher after a major tax cut than before.

…

The basic point is that the Gap will attempt to pick a price that leads to the quantity of sales that earn the company the most money. The marketing executives may err either way: They may underprice the items, in which case they will sell out; or they may overprice the items, in which case they will have a warehouse full of sweatshirts.
Actually, there is another option. A firm can attempt to sell the same item to different people at different prices. (The fancy name is “price discrimination.”) The next time you are on an airplane, try this experiment: Ask the person next to you how much he or she paid for the ticket. It’s probably not what you paid; it may not even be close. You are sitting on the same plane, traveling to the same destination, eating the same peanuts—yet the prices you and your row mate paid for your tickets may not even have the same number of digits.
The basic challenge for the airline industry is to separate business travelers, who are willing to pay a great deal for a ticket, from pleasure travelers, who are on tighter budgets.

Starbucks doesn’t have a way to identify lavish customers perfectly, so it invites them to hang themselves with a choice of luxurious ropes.
• 35 •
T H E U N D E R C O V E R E C O N O M I S T
There’s one born every minute:
Two ways to find him
There are three common strategies for finding customers who are cavalier about price. Let’s cover two for now, and leave the best for last.
The first is what economists call “first degree price discrimination,” but we could call it the “unique target” strategy: to evaluate each customer as an individual and charge according to how much he or she is willing to pay. This is the strategy of the used-car salesman or the real estate agent. It usually takes skill and a lot of effort; hardly surprising, then, that it is most often seen for items that have a high value relative to the retailer’s time—cars and houses, of course, but also souvenirs in African street stalls, where the impoverished merchant will find it worth bargaining for some time to gain an extra dollar.

Why on earth, I asked Wolf, would anyone pay $100 extra—probably every month—to fill a prescription at Walgreens instead of Costco?
His answer: if a retiree is used to filling his prescriptions at Walgreens, that’s where he fills his prescriptions, and he assumes that the price of a generic drug (or, perhaps, any drug) is pretty much the same at any pharmacy. Talk about information asymmetry; talk about price discrimination!
I had meant to write about this, and had collected a few relevant links: a TV news report in Houston about Wolf’s discovery; an extensive price comparison compiled by a TV news reporter in Detroit; a Consumer Reports survey; and a research report on the subject from Senator Dianne Feinstein.
But I had forgotten all about this issue until I read a comprehensive Wall Street Journal article that does a good job of measuring the difference in prices between chains.

…

At hotels, for instance, by not automatically washing towels during a guest’s stay, the hotel saves both money and the environment. Green innovations can be featured in advertising campaigns to attract customers. Another potential benefit of “going green” is that it makes environmentally minded employees happy, increasing their loyalty to the firm.
A Berlin brothel has hit on another way to use environmental arguments to its benefit: price discrimination. As Mary MacPherson Lane writes in an AP article:
The bordellos in the capital of Germany, where prostitution is legal, have seen business suffer with the global financial crisis. Patrons have become more frugal and there are fewer potential customers coming to the city for business trips and conferences.
But Maison d’Envie has seen its business begin to return since it began offering the euro 5 ($7.50) discount in July . . .

…

To qualify, customers must show the receptionist either a bicycle padlock key or proof they used public transit to get to the neighborhood. That knocks the price for 45 minutes in a room, for example, to euro 65 from euro 70.
Although the brothel says the reason for the price discount is that it wants to be environmentally conscious, it sure looks to me like the brothel is dressing up some good old-fashioned price discrimination arguments in a green disguise.
Customers who come by bus or bicycle are likely to have lower incomes and be more price-sensitive than those who arrive by car. If that is the case, the brothel would like to charge such customers lower prices than the richer ones. The difficulty is that, without a justifiable rationale, the rich customers would be angry if the brothel tried to charge them more (and indeed, how in general, would the brothel know who is rich?).

The incentives created by copyright monopolies encourage textbook publishers to constantly adapt their books to persuade faculty to use new editions, even when the research in the area provides little reason to change a textbook. This
quickly makes used editions obsolete.
In addition, textbook publishers practice the same sort of price
discrimination as pharmaceutical companies, charging lower prices in Europe
and developing countries than they do in the United States. To preserve this type of price discrimination, the textbook publishers, like the drug companies, rely on the nanny state to police their marketing arrangements. They want the government to arrest people who sell their books at the wrong price in the
wrong place, since large price differences cannot persist in a truly free market.
It would be a simple matter to establish a small pool of public money to
contract with publishers to produce textbooks.

When operating an investment strategy,
and notwithstanding risk filters and stop loss rules, surprises should
be expected to occur with some frequency. The first demonstration
examines a single pair that exhibits textbook reversionary behavior
until a fundamental development, a takeover announcement, creates
a breakpoint. Next we discuss the twofold impact of an international
economic development, the credit crisis of 1998: introducing a new
risk factor into the equity market—temporary price discrimination
as a function of credit rating on corporate debt—and turning a
profitable year (to May) into a negative year (to August). Next we
consider how large redemptions from funds such as hedge, mutual,
and pension, create temporary disruptions to stock price dynamics
with deleterious effects on statistical arbitrage performance. Next
we relate the story of Regulation FD. Finally, in all this discussion
of performance trauma we revisit the theme of Chapter 5, clearing
up misunderstandings, specifically on the matter of correlation of
manager performance in negative return periods.
141
142
8.2
STATISTICAL ARBITRAGE
EVENT RISK
Figure 8.1 shows the price histories (daily close price, adjusted for
stock splits and dividends) for stocks Federal Home Loan Mortgage
Corporation (FRE) and Sunamerica, Inc.

…

Morningstar (Financial Times, Thursday, October 9)
advised investors to reduce or eliminate holdings in mutual funds
from Alliance Capital and Bank of America, as managers of those
funds had also engaged in timing schemes.
9.6.1
Interest Rates and Volatility
With very low interest rates, the value of a dollar a year from now (or
five years or ten years) is essentially the same as the value of a dollar
today. Notions of valuation of growth are dramatically different
than when higher interest rates prevail, when time has a dollar value.
With such equalization of valuations and with discriminatory factors
rendered impotent, volatility between similar stocks will decrease.
Higher interest rates are one factor that will increase stock price
discrimination and increase the prevalence and richness of reversion
opportunities. The process of increasing interest rates began at the
end of 2004. The Federal Reserve raised rates in a long, unbroken
sequence of small steps to 5 percent, and statistical arbitage generated
decent returns again starting in 2006.
Volatility has not increased since 2004. Indeed, it declined further
to record low levels.

(In the competitive dealer
model, in contrast, limq→0+ P(q) = limq→0− P(q) = µX .) The pricing schedule is sufficiently discriminatory that a ω considerably greater than µX
is necessary before the customer will consider an even an infinitesimal
purchase.
DEPTH
The relationship between the supply schedule and expectation revision functions is broadly similar to the empirical finding depicted in
figure 13.1, with the latter lying below the former. Price discrimination in
the book can therefore potentially account for the empirical evidence. We
will subsequently return to this point.
13.3.3 The Monopolistic Dealer
The monopolistic dealer sets a price schedule to maximize E[P(q) −
E[X |q]], where the outer expectation is over all incoming customers (or
equivalently, quantities). As the customer demands depend on P(q), P(q)
implicitly enters into E[X |q].

Benjamin Reed Shiller, an economics professor at Brandeis University, analyzed data about a large panel of computer users and found that Netflix could raise profits by 1.4 percent if it adopted individually tailored prices based on customers’ Web-browsing histories. He found that Web-browsing data were more predictive than standard demographic data of users’ willingness to pay high prices for a Netflix subscription. “This suggests that 1st degree price discrimination might evolve from merely theoretical to practical and widely employed,” he concluded.
* * *
I wanted to block ad tracking. But first I had to sort through all the misinformation about how to block tracking.
Many people believe that they can use Google Chrome’s “Incognito” mode or Microsoft Internet Explorer’s “InPrivate Browsing” mode to avoid being monitored online. But that is not true.

The American Beauty rose can be produced in the splendor and fragrance which bring cheer to its beholder only by sacrificing the early buds which grow up around it." As with the rose, so with the Standard Oil Company. "This is not an evil tendency in business. It is merely the working-out of a law of nature and a law of God."17 This did align God and the American Beauty rose with railroad rebates, exclusive control of pipelines, systematic price discrimination, and some other remarkably aggressive business practices.
V
In 1956, the retiring president of the National Association of Manufacturers called solemnly in the name of Herbert Spencer on the working men of the country to reject the slavery of their unions and on businessmen to renounce the paternalism of Washington. Concerning the latter, he said in a dynamic sentence: "Before we can build solidly into the glorious future that is another unsound part of our structure which we'll have to get rid of, even though it causes severe pain to us businessmen to forgo the federal crutches we have been leaning on."

…

The position of the worker who is protected against arbitrary firing by a sound seniority system is far from ideal if he receives an entirely nondiscriminatory discharge as the result of an insufficiency of demand for the product he is making. This is especially so if a general shortage of demand keeps him from finding a job elsewhere. While unemployment compensation is better than nothing, a job is better than either. Even with an effective enforcement of the laws preventing price discrimination—roughly the use by a large firm of its size to exact and offer prices which small competitors cannot obtain or quote—the competitive position of the small retailer in a time of depression is not happy. Regardless of the conditions of competition, it is much better when the demand for everyone's product is good. Farm support prices are a useful protection against sudden adverse price movements.

As a practical matter, this interpretation expands the formal rights of copyright holders to cover any and all computer-mediated uses of their works, because no use can be made with a computer without at least formally implicating the right to copy. More important than the formal legal right, however, this universal baseline claim to a right to control even simple reading of one's copyrighted work marked a change in attitude. Justified later through various claims--such as the efficiency of private ordering or of price discrimination--it came to stand for a fairly broad proposition: Owners should have the right to control all valuable uses of their works. Combined with the possibility and existence of technical controls on actual use and the DMCA's prohibition on circumventing those controls, this means that copyright law has shifted. It existed throughout most of its history as a regulatory provision that reserved certain uses of works for exclusive control by authors, but left other, not explicitly constrained uses free.

Offering individualized discounts, however, can amount to the same thing for the vendor while appearing much more palatable to the buyer. Who would complain about receiving a coupon for $10 off the listed price of an item, even if the coupon were not transferable to any other Amazon user? (The answer may be “someone who did not get the coupon,” but to most people the second scenario is less troubling than the one in which different prices were charged from the start.)21
If data mining could facilitate price discrimination for Amazon or other online retailers, it could operate in the tangible world as well. As a shopper uses a loyal-customer card, certain discounts are offered at the register personalized to that customer. Soon, the price of a loaf of bread at the store becomes indeterminate: there is a sticker price, but when the shopper takes the bread up front, the store can announce a special individualized discount based on her relationship with the store.

The basic monopsony model assumes that an employer will set a single wage rate for workers of a particular type (that is, skill or occupation) rather than follow what is called in a monopoly situation a price discrimination policy (that is, charging different prices to different consumers). The need to set a single wage for the workplace has the effect of pushing up the cost to the employer of hiring more workers of a given type, since the additional cost of one more worker requires paying him or her more, as well as more for all who are already employed at that type of work.29
In principle, an employer with monopsony power could compensate workers according to their individual contribution to production (or “marginal product,” the additional output per worker) if it pursued a varied wage policy. But this goes against the fairness grain and, as we have seen, has never been a common form of compensation. Wage discrimination (à la price discrimination) is rarely seen in large firms despite the benefits it could confer.

But the airline won't do this, because if seats were regularly available
for next to nothing whenever one was empty, this would affect the
behavior of full-fare-paying passengers. Airlines have the sophisticated yield management systems of chapter 12 to handle precisely
this problem. Their aim is not to fill the plane, but to strike a balance
between filling seats and obtaining good prices for seats. If they could
read minds and gauge exactly how much each passenger would be
willing to pay, they could engage in perfect price discrimination 7 and
achieve Pareto efficiency. But of course they can't.
So free trade leads to Pareto efficiency only in perfectly competitive
markets because only perfectly competitive markets are free of these
incentive compatibility problems. Market economies that are competitive but not perfectly competitive offer many opportunities for Pareto
improvements. Chapters 18 through 24 will explore many instances.

…

This follows almost inescapably from the rationality
postulates described in chapters 17 and 18.
2. Buchholz (1999), Posner (1998).
3. Dworkin (1977), chap. 4; Waldron (1984), 153-67.
4. Berlin (2000).
5. For a summary of the standard economic approach to the value-of-life issues,
see Jones-Lee (1976). For a well-balanced background to why this approach is
untenable, see Douglas and Wildavsky (1982).
6. Often called a Pareto optimum.
7. Perfect-"ftrst degree"-price discrimination tailors the price for each good sold
precisely to its user so that all consumer surplus is extracted.
8. Arrow (1951b).
Part IV: THE TRUTH ABOUT MARKETS
Chapter 17: Neoclassical Economics and After
•••••••••••••••••••••••••••••••••••••
1. For example, for James Tobinn the invisible hand is "one of the great ideas of
history and one of the most influential." Tobin (1992), 117.
2. Yergin and Stanislaw (1998), 398.

On the contrary, he thinks that while licensing has gone much too far it has some real functions to perform. He suggests procedural reforms and changes that in his view would limit the abuse of licensure arrangements.
5 Ibid., pp. 121–22.
6 Ibid., p. 146.
7 See, for example, Wesley Mitchell’s famous article on the “Backward Art of Spending Money,” reprinted in his book of essays carrying that title (New York: McGraw-Hill, 1937), pp. 3–19.
8 ‘See Reuben Kessel, “Price Discrimination in Medicine,” The Journal of Law and Economics, Vol. 1 (October, 1958), 20–53.
Chapter X
The Distribution of Income
A CENTRAL ELEMENT IN the development of a collectivist sentiment in this century, at least in Western countries, has been a belief in equality of income as a social goal and a willingness to use the arm of the state to promote it. Two very different questions must be asked in evaluating this egalitarian sentiment and the egalitarian measures it has produced.

In the same way that all we see are the end results when algorithms select the personalized banners that appear on websites we browse, or determine the suggested films recommended to us on Netflix, so with differential pricing are customers not informed that they are being asked to pay more money than their next-door neighbor. After all, who would continue shopping if this were the case? As Joseph Turow, a professor at the University of Pennsylvania’s Annenberg School for Communication and frequent writer about all things marketing, has pointed out in an article that appeared in the New York Times: “The flow of data about us is so surreptitious and so complex that we won’t even know when price discrimination starts. We’ll just get different prices, different news, different entertainment.”42
The Discrimination Formula?
A number of Internet theorists have argued that in the digital world, previous classifications used for discrimination (including race, gender or sexuality) will fall away—if they haven’t already. Alvin Toffler’s Third Wave identifies a number of individuals and groups subtly or openly discriminated against during the last centuries and argues that this marginalization is the product of Second Wave societies.

In the 1880s, the railroads were the largest sector of the economy in terms of invested capital, just as the health-care sector in 2010 consumed almost 18 percent of American GDP. Both the railroads and the health-care system had evolved out of the private sector with increasingly heavy political inputs in response to perceived abuses. Politicians in the nineteenth century limited the ability of railroads to recover costs through differential pricing, just as politicians today try to limit price discrimination by insurance companies. Both railroads and health care pitted diverse interests against one another: shippers and farmers against the railroads, doctors and drug companies against insurers. Both sectors generated economic inefficiencies due to the inconsistencies with which policies were applied across the country. And finally, both were economic activities whose implications transcended the jurisdiction of individual states and called out for uniform federal regulation, something that was not forthcoming given America’s traditions of federalism and antistatist political culture.6
In response to the conflicting interests driving expansion of the railroads, there was considerable political pressure to make the system fairer and more reliable for both providers and users of rail services.

…

And finally, both were economic activities whose implications transcended the jurisdiction of individual states and called out for uniform federal regulation, something that was not forthcoming given America’s traditions of federalism and antistatist political culture.6
In response to the conflicting interests driving expansion of the railroads, there was considerable political pressure to make the system fairer and more reliable for both providers and users of rail services. However, at this point in American history, there was no precedent for economic regulation on a national level; the Constitution’s Commerce Clause reserved regulatory powers to the federal government only in cases of foreign and interstate commerce. In the period following the Civil War, a variety of states had passed Granger laws that sought to prohibit price discrimination, and some, including Massachusetts, established relatively effective commissions to stabilize the market. The right of individual states to set prices and regulate economic activity was upheld by the Supreme Court in 1877 in Munn v. Illinois.7 But railroads could not be adequately regulated at a state level. They were the prime examples of interstate commerce that crossed numerous jurisdictional boundaries, a fact recognized in 1886 in Wabash v.

Customers complained that this was simply not fair and that it made them lose faith in the company.
A close cousin to price rationing is the equally familiar “yield management,” whereby airlines and hotels moderate prices depending on demand. This practice is widespread and largely (if grumpily) tolerated. We have come to accept the idea that the guy sitting next to us in the back of the plane might have paid far less than we did for the seat. “Price discrimination is considered fair if it takes place for a socially acceptable reason,” Sarah Maxwell told me. Of course, “socially acceptable” is determined by context. If we all agree that airlines have a right to charge someone double for a ticket because he or she happens to purchase it outside a certain time frame, so be it.
Ultimately, most of us consider “fair” almost any price that benefits ourselves.

This business about “what’s your market”
incensed many importers who suspected that they might not be getting
the absolute lowest price available.
Factory owners were good at sizing up their customers, and they
took their cues from the vendors who sold vegetables in China’s many
wet markets. They tended to charge more for customers who could
afford to pay extra. There was no such thing as a single “China price”
for any given product. Pricing was all over the place, and manufacturers
got whatever they could.
Price discrimination was nothing new in business, but it was
a practice associated with marketing companies, not manufacturers.
Buyers expected that a factory would make its product available to all
at the same price, but this was not how it worked in China. Importers
resented that they were sized up in such a crude fashion, and that
they might be disadvantaged in a pricing negotiation because of their
background.

Many a small software vendor has seen their revenues go up and the amount of customer bickering about price go way
down when they eliminated coupons, discounts, deals, multiple versions,
and tiers. Somehow, it seems like customers would rather pay $100
when everyone else is paying $100 than pay $79 if they know there’s
someone out there who got it for $78. Heck, GM made a whole car
company, Saturn, based on the principle that the offered price is fair and
you don’t have to bargain.
Even assuming you’re willing to deal with a long-term erosion of customer goodwill caused by blatant price discrimination, segmentation is
just not that easy to pull off. First of all, as soon as your customers find
out you’re doing it, they’ll lie about who they are:
• Frequent business travelers rearranged their tickets to include
dual Saturday-night stays. For example, a consultant living in
Pittsburgh and working in Seattle Monday through Thursday
would buy a two-week trip from Pittsburgh to Seattle and then a
weekend trip home in the middle.

An interesting question is whether the willingness of some buyers to buy warranties that would not be a good deal even if they were not overpriced results in a lower price for the product itself; could the product be a loss leader (as are razors), with the money to be made on warranties and/or repairs? Perhaps, but this seems like a stretch.
There is reason to go slow on a behavioral explanation here. In addition to the fact that most people do not buy warranties, competitively sold warranties are available for large purchases like automobiles (after the “free” manufacturer’s warranty expires). It may also be that warranties are a form of price discrimination. A buyer who considers himself lucky for having gotten a good deal on a good product may be more willing to pay for a warranty than a buyer who thinks his particular purchase and purchase price are run of the mill and par for the course. The first buyer, having discovered “treasure,” may be more willing to invest in protecting it. Finally, the price responsiveness of demand for warranties implies that, even if the preferences are not so rational, consumer behavior in fulfilling those preferences does repeat the standard model.

Wheat and cattle, timber and sheep, all had to be shipped by rail both as raw and as finished products, and the fact that only the railroads themselves understood the logic of their price structure meant that their rates seemed like unreasonable and monopolistic taxation to the people having to pay them.38 New states gained disproportionate power due to the importance of railroads to the less-developed regions of the United States and because senators were allocated without reference to population.39 At the same time, railroad price discrimination against small shippers sparked protest.40
As urban workers reacted to industrialization, so rural workers reacted to railroad corporatism. In Texas, farmers formed the Farmers’ Alliance, combining ideas about agrarian self-sufficiency with the notion that credit—paper money or “greenbacks”—should be more widely available. By 1885, the Farmers’ Alliance had reached 30,000 members in 49 Texas counties.

If everything is left to private contract and court settlements, the rich have an inherent advantage, too: you have to be well off to sue someone and argue a case, potentially for years. Legislation and regulation have the advantage of creating a level playing field that is fair for everyone, and ultimately cheaper in that every citizen and company knows that the presumption is that everyone will comply. The Sherman Act of 1890 had begun the introduction of pro-competition laws, but the watershed came with Wilson’s Clayton Act of 1914, which outlawed monopoly and unfair price discrimination. This was also the foundation of Roosevelt’s New Deal two decades later. However, judges were still needed to make the law stick.
The two landmark cases were the successful actions against the aluminium giant Alcoa in 1948 and against AT & T in 1959. The latter was forced to license the transistor, and it was finally broken up into seven so-called ‘Baby Bells’ in 1984. The transistor licensing set in train the innovation that led to the semi-conductor revolution and the United States’ leadership in ICT, while the break-up of the telecoms monopoly was the precondition for the mobile phone and internet revolutions.

The proposal, which has no provisions for a multistakeholders approach, would have the effect of increasing government control of the Internet.9 The preamble to the proposal states unequivocally that the “policy authority for Internet-related public issues is the sovereign right of States.”10
The private sector is also beginning to stray from the three-party stakeholder alliance, seeking increased income and profits by way of price discrimination—a move that threatens to undermine one of the guiding principles of the Internet: network neutrality, a principle that assures a nondiscriminatory, open, universal Communications Commons in which every participant enjoys equal access and inclusion.
The concept of network neutrality grew out of the end-to-end design structure of the Internet, which favors the users rather than the network providers.

Rockefeller’s Standard Oil Company, and the United States Steel Corporation, which the financier J. P. Morgan put together after buying out Andrew Carnegie’s business empire.
Worries that the new combines were squeezing out smaller competitors and bilking customers led to the introduction of antitrust laws. The Sherman Antitrust Act of 1890 outlawed restraints of trade by existing monopolies and any attempt to create a new monopoly. The Clayton Antitrust Act of 1914 proscribed price discrimination, exclusive dealing contracts, and other predatory tactics that the trusts had used to boost their profits. During the same era, President Theodore Roosevelt (1901–1909) and his successor, William Howard Taft (1909–1913), issued lawsuits to break up more than a hundred of the trusts, including Standard Oil.
On paper, the antitrust laws, which remain on the books, were strong pieces of legislation.

Conspiracies in restraint of trade
were unquestionably illegal under the common law. 8 But rarely was a giant
corporation the sole supplier of a well-defined product or service. More
commonly it was an aggressively innovative firm, supplying improved products and reducing its costs of production and its prices, and increasing its
share of the market as a result. Unsuccessful competitors complained bitterly
that the "monopolists" were driving them to the wall. 9 Customers frequently
objected to real or imagined price discrimination. More than anything else,
rate discrimination provoked the outrage of midwestern shippers against the
railroads. Often the criticism of a big corporation's alleged monopoly power
could be deflected by showing that the firm produced better products or
services in growing volumes at ever lower prices.
But this defense, even if appropriate, did nothing to allay the charge that
the great corporations subverted the democratic political process.

Deborah Devine, Housing Choice Voucher Location Patterns: Implications for Participant and Neighborhood Welfare (Washington, DC: US Department of Housing and Urban Development, 2003); George Galster, “Consequences from the Redistribution of Urban Poverty During the 1990s: A Cautionary Tale,” Economic Development Quarterly 19 (2005): 119–25.
4. Milwaukee Area Renters Study, 2009–2011; US Department of Housing and Urban Development, Final FY 2008 Fair Market Rent Documentation System.
5. Robert Collinson and Peter Ganong, “Incidence and Price Discrimination: Evidence from Housing Vouchers,” working paper, Harvard University and the US Department of Housing and Urban Development, 2014; Eva Rosen, The Rise of the Horizontal Ghetto: Poverty in a Post–Public Housing Era, PhD diss. (Cambridge: Harvard University, 2014).
6. The Milwaukee Area Renters Study offered a unique opportunity to investigate if voucher holders were being overcharged because the sample included assisted and unassisted renters.

The irony, they point out, is that these alleged “collusive focal points were provided by the state legislatures.”127 An earlier study had indeed revealed evidence of price collusion among credit card companies Visa and MasterCard in the 1980s to drive up interest rates.128 Not only did the comprehensive payday pricing study show possible price collusion, it also showed discrimination: “The larger data contain stronger evidence of third-degree price discrimination: loan prices were higher in neighborhoods near military bases and in disproportionately minority neighborhoods, consistent with exploitation of price inelasticity among these demographic groups.”129 The study concluded that these prices could be reduced only if banks or other providers of credit could compete in this space. In other words, credit alternatives, not regulation, would drive down prices.

pages: 436words: 114,278

Crude Volatility: The History and the Future of Boom-Bust Oil Prices
by
Robert McNally

For example, nominal midcontinent crude oil prices rose by more than 300 percent between 1914 and 1918, whereas, Chicago gasoline prices rose by less than half that amount.42
While gasoline prices may have been rising less than crude oil and prices of other goods, they caused dislocations in industry and triggered many complaints from all over the country. In Kansas City, meat packers discarded trucks and went back to horse-drawn wagons: “Price of Gasoline Putting Horse Back in Harness Again,” one Indiana newspaper reported.43 Consumers charged gasoline prices were excessively high and that refiners and other were practicing price discrimination. The uproar began in 1915 and triggered Senate resolutions and an investigation by the Federal Trade Commission (FTC). The FTC concluded prices were “necessarily and naturally somewhat higher” in 1915 due to surging demand outpacing production, requiring inventory draws.44 Though the Commission cautioned that it was not clear how much higher gasoline prices should have been based on market conditions.45
Rising pump prices sparked rumors of pending bigger price jumps and shortages.46 In 1918 car dealers placed ads in newspapers to ensure their customers that gasoline production and inventories were adequate and “kill this gasoline shortage myth.”47 Motorists were outraged and officials launched investigations of industry practices, especially on the West Coast where actual shortages developed.48 “Gasoline prices follow crude,” Standard Oil of Indiana tried to explain to the public in 1920, promising it was “straining every fibre of its highly specialized [refining] organization to meet [gasoline] demand.”49 In June, 1920 the Federal Trade Commission again reported to Congress that rising gasoline prices were due “more to varying conditions of supply and demand in the light of emphasized and pessimistic statements as to the future supply than to a combination in restraint of trade.”50 This was the second such FTC investigation prompted by rising gasoline prices but certainly was not the last.

Senior’s behavior guaranteed that anxiety over the fortune’s legitimacy would spread to his descendants, strengthening their guilty consciences. In his thesis, Nelson, coached by Inglis, flatly denied that Standard Oil ever drove competitors from business unfairly. “These companies were treated with extreme fairness and in many cases with generosity,” he wrote, dismissing as mythical that Standard Oil had amassed power “through local price discrimination, bogus independents and espionage.” 32
In 1929, Nelson turned twenty-one on the same day that Rockefeller reached ninety. “The 90 makes my 21 seem mighty small and insignificant,” he wrote his parents, “just like a little sapling standing by a mighty fir. But the sapling still has time to grow and develop and someday it might itself turn into a tree of some merit. Who knows?”33 Nelson leaped at any chance to golf with Rockefeller in Florida and was an attentive audience for his yarns and witticisms.